by Robert Mandelbaum - Oct 1998
Let�s face it. A main reason for the recent explosion of extended-stay
hotel development is the historical success of this segment of the lodging
industry. Extended-stay hotels have always achieved occupancy rates
and profit margins that far exceeded overall industry averages. On
the surface, these would appear to be very compelling reasons to enter
the marketplace.
However, the newest entrants into the extended-stay market are quite
different from their predecessors. Prior to the 1990s, an extended-stay
hotel was pretty much defined by Residence Inns and comparably priced brands.
Although these hotels achieved average daily rates lower than other full-service
all-suite or upscale full-service properties, they tended to be priced
in the upper-end of their respective markets. In fact, this pricing
relative to other full-service hotels, combined with the full residential
feel of the guest unit and property, represented one of the main competitive
features for extended-stay hotels. They are a positive price-value
alternative for someone desiring to stay for an extended period of time
and with the means to pay for the expanded accommodations.
The current generation of extended-stay hotels, however, is dominated
by properties that are priced in the mid- or lower end of their respective
market areas. Like their more expensive brethren, these moderate-price,
extended-stay properties offer a residential-style guest unit, albeit with
more modest furnishings. However, unlike the upper-end extended-stay
hotels, the moderate-price properties are designed to go after their niche
target market of price-sensitive, extended-stay travelers.
The question that has yet to been answered is the overall depth of the
price-sensitive extended-stay market. Given the relative newness
of this type of hotel, little historical data is available to effectively
measure the national appeal for these properties. Future occupancies
will certainly be the best indicator of the depth of demand for this type
of property.
Look At Middle, Not Just The
Top Line
Besides market support, a major reason for the historical success of
extended-stay hotels is their ability to achieve high profit margins.
When operating as they were designed, that is, for capturing a high percentage
of long-term stays, extended-stay hotels are extremely profit-efficient
and bring a large percentage of dollars to the bottom line. In 1997,
the average operating profit margin (before capital reserve, debt service,
rent, income taxes, depreciation, and amortization) for all extended-stay
hotels was 44.8 percent. This compares to an overall industry average
of 30.0 percent and 37.7 percent for all-suite hotels. The primary
reason for reason for the efficiency of extended-stay properties relative
to other hotels is the limited amount of services offered, combined with
a low labor requirement.
By not offering extensive food and beverage facilities or public spaces,
upper-end extended-stay properties benefit from the same efficiencies of
other limited-service hotels. Historically, the upper-end, extended-stay
properties enjoyed the benefit of low operating expenses, combined with
a pricing premium over budget and mid-price properties. What remains
to be seen is if the newer moderate-price extended-stay properties can
achieve these levels of profit margin without the pricing premium.
Early indications show a struggle. From our 1997 Trends in the
Hotel Industry database, we analyzed the financial performance of the historically
upper-end, extended-stay brands, compared to hotels operating under the
more moderately priced, extended-stay affiliations. (Due to the newness
of the �budget� extended-stay brands, we do not feel our sample in this
segment is representative for comparison at this time). In 1997,
enjoying the benefit of a premium in both occupancy and average daily rate,
the upper-end, extended-stay properties were able to achieve an operating
profit margin of 45.9 percent, compared to 43.0 percent for the mid-price,
extended-stay hotels.
Certainly 43.0 percent is an excellent profit margin. However,
a more telling story comes through when operating profits are compared
on a dollar-per-available-room basis. The upper-end, extended-stay
hotels achieved an average operating profit of $12,796 per available room,
57.8 percent greater than that achieved by the average mid-price, extended-stay
property. Assuming there is a correlation between profits per available
room and supportable development costs per available room, it is doubtful
that the average mid-price, extended-stay hotel can be developed for 58
percent less than an upper-end property on the same site.
Built For Labor Efficiency
Another success factor for the upper-end, extended-stay properties is
the low cost of labor. The limited amount of services offered, combined
with lower occurrence of check ins/outs, allows for these hotels to operate
with a minimum level of staffing. Total payroll and related expenses
for upper-end, extended-stay hotels averaged 20.8 percent of total revenue
in 1997, compared to 31.1 percent for all hotels.
Once again, the inability to achieve the rate premium of their higher-end
cousins pushes the payroll percentage for the mid-price, extended-stay
properties up slightly, to 21.9 percent. To achieve their desired
level of labor productivity, mid-price, extended-stay properties are even
more dependent on a high percentage of long-term stays. Unlike the
upper-end, extended-stay hotels, the mid-price, extended-stay hotels often
limit the frequency of housekeeping services and shut down the front desk
at night. If the mid-price, extended-stay hotels are not successful
in penetrating and capturing price-sensitive, extended-stay travelers,
then they stand to lose a large portion of the operating efficiencies they
are designed for, and need to achieve, in order to be financially successful.
Watch Those Costs
As with all hotel developments, each individual deal needs to be examined
for its own market and financial feasibility. The analysis presented
in this article is not intended to condemn the new breed of extended-stay
hotels, nor dissuade someone from building one. Instead, it is a
warning not to assume that the historical performance of an upper-end extended-stay
hotel in a market is automatically indicative of success for a more moderate-price
facility.
Due to the newness of the moderate-price, extended-stay hotel segment,
no significant track record of market or financial data is available for
analysis. In the future, we might see that these properties are capable
of �stealing� demand from the upper-end, extended-stay properties, or can
effectively penetrate the economy and mid-market transient hotel market.
However, in the near-term, it does appear that the inability to enjoy the
rate-premium cushion achieved by the upper-end, extended-stay properties
does force the moderate-price, extended-stay properties to watch their
operating expenses carefully.
Comparative
Rooms Department Profits and Payroll Expenses
|
All Suite Hotels
|
All Extended-Stay Hotels
|
Upper-End Extended Stay Hotels
|
Mid-Priced Extended-Stay hotels
|
Occupancy |
74.3% |
74.2% |
81.1% |
66.6% |
Average Daily Rate |
$107.90 |
$83.04 |
$90.11 |
$73.44 |
Rooms Department Profit |
75.9% |
78.4% |
80.0% |
75.3% |
Total Payroll and Related Expenses as a Perceent of Total Revenue |
23.9% |
21.0% |
20.8% |
21.9% |
Total Payroll and Related Expenses Per Available Room |
$8,081 |
$4,979 |
$5,832 |
$4,131 |
Source: PKF Consulting, 1998 Trends in the Hotel Industry
Comparative
All-Suite Profitablility
Note: * Income before capital reserve, debt service, rent, income taxes,
depreciation, and amortization.
|
All Suite Hotels
|
All Extended-Stay Hotels
|
Upper-End Extended Stay Hotels
|
Mid-Priced Extended-Stay hotels
|
Total Revenue Per Available Room |
$33,812 |
$23,710 |
$28,037 |
$18,865 |
Rooms Revenue as a Percent of Total Revenue |
86.1% |
94.7% |
94.8% |
94.6% |
Operating Profits* as a Percent of Total Revenue |
37.7% |
44.8% |
45.9% |
43.0% |
Operating Profits* Per Available Room |
$12,784 |
$10,584 |
$12,796 |
$8,108 |
Source: PKF Consulting, 1998 Trends in the Hotel Industry
Operating a moderate-price, extended-stay hotel offers it own set of
unique marketing and management challenges, distinctly different than the
historical experiences of the upper-end properties in this segment.
* * *
Robert Mandelbaum is Director of Research for PKF Consulting,
an international management consulting firm specializing in the hospitality
industry. He is located in the firm�s Atlanta office (404-842-1150).
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